Question

In a pure capitalist system where free markets exist, freedom of enterprise and freedom of choice exist. However, if one chooses to produce that which the consumer does not want, or at least doesn’t want enough to cover the cost of the scarce resources employed, the producer-entrepreneur will find this freedom of enterprise limited by the decisions of consumers in the marketplace. On the demand side, consumer choice is limited by the prices of products that the consumer wants and the consumer’s income, which is limited by the value that the consumer’s own resources can earn in resource markets. How does this concept relate to the ‘invisible hand’?

Answer 1

The concept of invisible hand essentially implies that there is no need of government intervention for market to be in equilibrium. Market forces of supply and demand will eventually take the economy towards equilibrium with proper therein adjustments. With adjustments we mean that quantity supplied will be equal to the amount demanded by consumers at given price. Consumers are constrained by income there resources will earn in the resource markets and the price offered by the suppliers whereas suppliers are facing demand constraints for their products. According to the theory both consumers and suppliers act in 'self interest' and there actions will benefit the society as a whole. so if a producer is acting in self interest , he'll try to maximize the profit and that can be done by producing appropriate quantity as 'demanded' by individuals or he' ll be losing a part of his profit. So with free exchange suppliers get to know what consumers are demanding and how to bring that up into the market. So the given concept is basically a raw explanation of invisible hand.